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The American Prospect - articles by authorenBehind the Numbers: The End of Unemployment?http://www.prospect.org/article/behind-numbers-end-unemployment
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<p>
<font size="+2">W</font>hether our current, relatively low unemployment rates<br />
can be sustained without increasing inflation has been a point<br />
of contention among economists, financial market analysts, and<br />
policymakers. Arguments over trade-offs between unemployment<br />
and inflation, however, too quickly gloss over the causes of our<br />
falling unemployment. The cause seems relatively straightforward:<br />
a sustained upturn in the business cycle. But this simple explanation<br />
overlooks another potent factor: the rising rate of labor force<br />
participation.</p>
<p>
Compared to previous economic expansions, the economic growth<br />
of the last few years has actually been quite weak. During the<br />
previous two economic expansions, of 1975-1980 and 1982-1990,<br />
real economic growth averaged 4.3 percent and 3.6 percent per<br />
year, respectively. Real economic growth since the end of the<br />
last recession in early 1991, by contrast, has averaged an anemic<br />
2.7 percent per year, even taking into account the recent economic<br />
surge. It seems improbable that such slow economic growth is alone<br />
responsible for our current low rate of unemployment. But if the<br />
business cycle is not solely responsible, what else is? </p>
<p>
One deeper explanation is a quiet but fundamental shift in the<br />
workforce over the last few decades, reflecting demographic and<br />
cultural changes. These shifts, the focus of this article, deserve<br />
far more scrutiny. If they are even partially responsible for<br />
our current low unemployment rates, they could easily produce<br />
a further drop in unemployment and a substantial increase in wages.<br />
But given the Fed's aversion to tight labor markets, that happy<br />
result could produce more restrictive monetary policy and even<br />
slower growth. </p>
<p>
<a name="back" id="back"></a><br /></p><hr noshade="noshade" size="2" /><h3>EVERYBODY WORKS </h3>
<p>
While the unemployment rate has waxed and waned with changes in<br />
the business cycle, employment as a percentage of the population<br />
has increased quite dramatically. In 1963, the last year of the<br />
Kennedy administration, just 35.8 percent of the population worked.<br />
Today that number is 47.9 percent. This job growth has paralleled<br />
a substantial increase in labor force participation. In 1963 just<br />
38 percent of the U.S. population was in the labor force. Today,<br />
thanks to a huge infusion of baby boomers and women, more than<br />
50 percent of the population is in the labor forceworking or<br />
seeking work.<a href="#footnote" target="_self">*</a> </p>
<p>
Given this sizable influx of job seekers, it is not surprising<br />
that the U.S. economy has experienced periodic high unemployment.<br />
On the contrary, what is surprising is that unemployment rates<br />
have been as low as they have been. The American economy has shown<br />
a tremendous capacity to put job seekers to work.</p>
<p>
But even despite a small jump in recent months, this steady increase<br />
in people seeking employment seems to be reaching its natural<br />
limits. Growth in labor force participation rates, which began<br />
in the early 1960s, peaked in the 1970s at about two-thirds of<br />
a percentage point per year. The rate of growth began to slow<br />
in the 1980s, dropping roughly in half, and finally slowed to<br />
a crawl from about 1989 onward, when increases averaged about<br />
0.07 percent per year, or roughly one-tenth the rate of increase<br />
during the 1970s. The influx of baby boomers into the job market,<br />
which crested in the late 1970s, has played out, and women's participation<br />
rates now nearly equal men's.</p>
<p>
Flattening labor force participation rates spell good news for<br />
unemployment, as fewer applicants chase the existing supply of<br />
jobs. But they spell bad news for economic growth, which has been<br />
boosted substantially by the increased output of the new labor<br />
force participants. This combination provides a compelling explanation<br />
for our otherwise confusing low-growth, low-unemployment economy.<br />
Slower workforce growth may also help explain why unemployment<br />
is just now returning to levels rarely seen since the early 1970s,<br />
when the most dramatic increases in labor participation were just<br />
getting started. Employment, which has at times over the last<br />
three decades lagged well behind accelerating labor participation,<br />
may finally be catching up. </p>
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<font size="+2">T</font>o fully understand its impact, imagine that the labor<br />
force growth rate in 1996 was what it averaged during the 1975-1980<br />
expansion. The workforce would have grown by 3.5 million instead<br />
of 1.6 million, adding an additional 1.9 million job seekers to<br />
the 7.2 million already unemployed. Absent any additional job<br />
growth, the unemployment rate would have risen to 6.7 percent<br />
in 1996, up from 5.6 percent in 1995, instead of dropping to 5.4<br />
percent as it did. In fact, had Bill Clinton faced the same labor<br />
force trends that confronted Jimmy Carter, last year's elections<br />
might have turned out quite differently.</p>
<p>
Moreover, the aging of the labor force may be just as important<br />
as changes in its size. Younger workers possess fewer skills and<br />
encounter greater difficulty in both obtaining and retaining jobs.<br />
The baby boomers exacerbated unemployment not just because of<br />
their sheer numbers, but because of their youth and inexperience.<br />
The baby bust could have the reverse effect. As young workers<br />
become a smaller fraction of a labor force that is itself already<br />
shrinking, unemployment may fall even more.</p>
<p>
In a sense, the effect of the baby boom on labor force participation<br />
has camouflaged a longer-term trend. Since as far back as World<br />
War II, male labor force participation rates have actually been<br />
dropping, mostly due to the increasing custom of retirement and<br />
the lengthening life spans of retirees. At some point this drop<br />
will occur among female workers as well. When that happens, overall<br />
labor force participation rates will contract, probably around<br />
the time baby boomers begin retiring 15 years from now. So our<br />
current labor surpluses could easily become labor shortages. Generalized<br />
unemployment might virtually disappear.</p>
<p>
</p><hr noshade="noshade" size="2" /><h3>WAGE INFLATION AND THE FEDERAL RESERVE</h3>
<p>
Left unimpeded, unemployment, already hovering close to 5 percent,<br />
could easily dip toward 4 percent in the next few years. Four<br />
percent unemployment is not unheard of in this country. It once<br />
was the level economists considered full employment.</p>
<p>
But Alan Greenspan and his compatriots at the Federal Reserve<br />
are not likely to welcome that prospect. Fearing inflation, they<br />
would feel enormous pressure from the financial community to raise<br />
interest rates to halt the downward trend. Of course unemployment<br />
has dropped to its current levels with little or no impact on<br />
inflation (perhaps due, at least partially, to the restraining<br />
impact of international trade on prices and wages). But to expect<br />
wage inflation to remain low indefinitely as unemployment continues<br />
to drop is overly optimistic. At some point the Fed would feel<br />
compelled to act. </p>
<p>
Raising interest rates to forestall wage inflation would jeopardize<br />
the ongoing health of the entire economy, and for very dubious<br />
reasons. In the current economic climate, wage increases are something<br />
to embrace, not something to fear. Real wages have been allowed<br />
to stagnate for far too long, notwithstanding recent debates by<br />
the Boskin Commission and others about the real rate of inflation<br />
and its impact on the value of those wages. Even accepting the<br />
Boskin adjustments, which remain controversial, real growth has<br />
slowed since the postwar boom and income inequality has widened.<br />
According to the Economic Policy Institute, from 1973 to 1995<br />
real median wages dropped from $11.02 to $10.13 per hour (1995<br />
dollars), a decline not significantly offset by a slight increase<br />
in fringe benefits. Over that same period the percentage of workers<br />
earning poverty-level wages$7.28 or less in 1995 (1994 dollars)increased<br />
from 23.5 to 29.7 percent. </p>
<p>
Falling wages are often blamed on a host of factors, including<br />
slower productivity gains since 1973, dropping rates of unionization,<br />
increased trade with low-wage countries, the loss of relatively<br />
high-paying manufacturing jobs and their replacement with low-paying<br />
service-sector jobs, and a failure to raise the minimum wage enough<br />
to keep pace with inflation. But basic supply and demand at a<br />
grander scale has probably also played a role. Over the last several<br />
decades, with the labor pool expanding so quickly, the oversupply<br />
of potential workers has, no doubt, put significant downward pressure<br />
on wages. If a tightening of the labor supply is at long last<br />
turning the tables on employers, forcing them to pay more, so<br />
much the better. After years of profiting from a surplus of labor,<br />
it seems only fair that employers pay more once the surplus has<br />
dried up. </p>
<p>
True, some of those wage increases will be passed on to consumers<br />
in the form of higher prices, and since workers are also consumers<br />
the real value of their increased wages will be somewhat diminished.<br />
But some of the cost also will be passed on to business owners<br />
and stockholders in the form of reduced profit margins. For stockholders<br />
in particular, given the rising stock prices of recent years,<br />
this seems a small price to pay. Even if real median wages are<br />
increased by just 1 percentage point a year, keeping pace with<br />
rising productivity, it would be a significant improvement over<br />
the record of the past few decadesand an improvement with practically<br />
no inflationary implications for the economy as a whole.</p>
<p>
</p><hr noshade="noshade" size="2" /><h3>HIDDEN UNEMPLOYMENT </h3>
<p>
Putting aside the possibility of Fed-induced stagnation, an economic<br />
future featuring lower unemployment and rising wages sounds rosy<br />
enough. But it would be a mistake to assume that demographics<br />
alone will solve these problems entirely, even if they do have<br />
a positive influence. Even if unemployment drops, the depth of<br />
our unemployment problem is much deeper than official figures<br />
indicate. In 1996, a year when the official unemployment rate<br />
was just 5.4 percent, the total number of unemployed and underemployed<br />
was actually 9.7 percent. On top of the 7.2 million Americans<br />
who were unemployed, an additional 1.6 million were discouraged<br />
or otherwise marginally attachedworkers who were neither working<br />
nor looking for work, but would have taken a job if one were offered.<br />
Another 4.1 million Americans, desiring full-time jobs, were involuntarily<br />
working part-time.</p>
<p>
Much of this unemployment and underemployment is highly concentrated<br />
in inner-city and rural communities that are too often left behind<br />
during periods of economic prosperity. Even during times of economic<br />
growth, the unemployment rate among 16- to 19-year-old black males,<br />
for example, ranges from 30 to 50 percent. If future job growth<br />
continues to concentrate in the suburbs, many of our hardest-hit<br />
communities may continue to miss out on the benefits of an improved<br />
economy.</p>
<p>
If the problem were just physical location, empowerment zones<br />
and transportation subsidies might be the answer, the first taking<br />
jobs to people, the second taking people to jobs. Unfortunately,<br />
the situation is more complicated than that. Job openings typically<br />
occur all along the skills spectrum, while a disproportionate<br />
number of the unemployed are unskilled. Unless enough low-skill<br />
jobs or training slots are created, a general labor shortage caused<br />
by changing demographics is no guarantee that unemployment will<br />
be eliminated.</p>
<p>
Another potential problem has more to do with the theory itself.<br />
Neoclassical economists would argue that changing labor force<br />
participation rates have little effect on unemployment, because<br />
prices (in this case, wages) adjust to reflect changing quantities.<br />
If the labor supply expands, wages will drop until the excess<br />
labor is fully utilized. As labor force participation rises, employment<br />
will tooas has happened. If a subsequent contraction of the labor<br />
force takes place, as may occur in the next 15 years, it will<br />
simply have the reverse effect. A tighter labor supply will push<br />
up wages, forcing many employers out of the labor market, until<br />
a new equilibrium is reached at a lower level of employment. As<br />
employment paralleled the expanding labor force on the way up,<br />
it will parallel it again on the way down, leaving unemployment<br />
unchanged. </p>
<p>
Keynesians would dispute this simple view of labor markets and<br />
unemployment, but the potential impact of contracting labor force<br />
participation rates on unemployment should<br />
be interpreted cautiously. Interestingly, since the neoclassical<br />
view predicts rising future wages, it still leaves open the possibility<br />
of a Fed-induced recession. Knowing which view is correct will<br />
require waiting a few years. But since neither view predicts the<br />
elimination of unemployment entirely, government activism on the<br />
issue will still be necessary.</p>
<p>
<font size="+2">W</font>hat form should activism take? The Clinton administration's<br />
primary approach to joblessness is a combination of job training<br />
and job subsidies. Unfortunately, these initiatives are probably<br />
too limited to have much impact, and may be the wrong policy solutions<br />
even if pursued more aggressively. While job training, if performed<br />
effectively, could help some of these workers, for many more the<br />
real educational challenge is basic literacy, not a lack of higher-order<br />
skills needed in our increasingly high-tech economy. Nor will<br />
training programs obviate the need to create more entry-level<br />
jobs. </p>
<p>
Job subsidies, an increasingly prominent fixture in the Clinton<br />
administration's arsenal of policy prescriptions since the enactment<br />
of last year's welfare reform law, are also a less than satisfactory<br />
answer. Studies<br />
by the New York-based Manpower Demonstration Research Corporation<br />
indicate that job subsidies have had, at best, a limited impact<br />
on unemployment. Job applicants who should benefit from such subsidies<br />
are too often stigmatized by them instead, and this hampers their<br />
job search efforts. When they do find jobs, the subsidy typically<br />
rewards employers for hiring someone they would have hired anyway,<br />
or subsidizes the hiring of one worker at the expense of anotherwith<br />
little or no net impact on unemployment.</p>
<p>
Ultimately, eliminating the last vestiges of unemployment may<br />
require both a friendlier Fed and a targeted public jobs initiative<br />
modeled after the Works Progress Administration (WPA), a program<br />
that em ployed millions of Americans during the height of the<br />
Great Depression. The nation's experience in the 1970s with the<br />
poorly run Comprehensive Employment and Training Act (CETA) program,<br />
our most recent experiment in public service employment, may make<br />
the creation of such an initiative more difficult politically.<br />
But workfare programs popping up all over the country in response<br />
to last year's welfare reform law may give<br />
the concept another chance. Unfortunately, workfare poses its<br />
own problems, including the potential for subminimum wages, inadequate<br />
child care, nonuniversal eligibility, and possible displacement<br />
of government workers, to name only a few. But if workfare can<br />
be transformed into a true public service employment program with<br />
jobs paying a livable wage, it could have an enormously positive<br />
impact. Certainly the Clinton administration's Nation al Service<br />
program has shown that community service is an idea not completely<br />
without merit. And if national unemployment levels continue to<br />
drop, the cost of eliminating the last trace of unemployment through<br />
such programs will become substantially more affordable.</p>
<p>
True full employment is a worthy goal. Too often policymakers<br />
are lulled into believing that because an official 5 percent unemployment<br />
rate is low by both international and recent historical standards,<br />
there is nothing left to do. But "low" unemployment,<br />
by these measures, is not low enough. It still leaves millions<br />
of Americans desperate to earn a living for themselves and their<br />
families. Calling our current levels of unemployment "low"<br />
really says more about our standards than it does about the economy.</p>
<p>
<a name="footnote" id="footnote"></a><br /></p><hr noshade="noshade" width="50%" align="Left" /><br /><font size="-1"><br />
*Employment and labor force participation rates<br />
are both expressed as a fraction of the entire<br />
population, not the noninstitutional civilians<br />
aged 16 and over, a more traditional measurement<br />
that undervalues the impact of baby boomers entering the workforce.<br /><br /><a href="#back" target="_self">Back to text</a><br /></font>
<p></p>
<p><br /><br /><!-- dhandler for print articles --></p></div></div></div>Wed, 19 Dec 2001 18:48:05 +0000141097 at http://www.prospect.orgPatrick Lester